Earnings Call Transcript - IBP Q4 2022

Darren Hicks, Managing Director of Investor Relations

Good morning, and welcome to Installed Building Products fourth quarter 2022 conference call. Earlier today, we issued a press release on the financial results for the fourth quarter, which can be found in the Investor Relations section of our website. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include statements about future expectations, anticipation, beliefs, estimates, forecasts, plans and prospects. These forward-looking statements are based on management's current expectations and involve risks and uncertainties. Any forward-looking statements made by management during this call are not a guarantee of future performance and actual results may differ materially as a result of various factors, including, without limitation, the potential adverse impact of the ongoing COVID-19 pandemic, general economic and industry conditions, rising home prices, inflation and interest rates, the material price and supply environment, the timing of increases in our selling prices and the factors discussed in the Risk Factors section of the company's annual report on Form 10-K as may be updated from time to time in our SEC filings. Any forward-looking statement speaks only as of the date hereof. The company undertakes no duty or obligation to update any forward-looking statements as a result of new information or future events, except as required by federal securities laws. In addition, management uses certain non-GAAP performance measures on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted share, adjusted gross profit, adjusted gross profit margin and adjusted selling and administrative expense. You can find a reconciliation of such measures to their nearest GAAP equivalent in the company's earnings release and additional reconciliation for adjusted EBITDA for earlier fiscal years in our investor presentation, which are available on our website. This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Financial Officer; and joined by Jason Niswonger, our Chief Administrative and Sustainability Officer. I will now turn the call over to Jeff.

Jeffrey Edwards, CEO

Thanks, Darren, and good morning to everyone joining us on today's call. As usual, I will start the call with some highlights and then turn the call over to Michael, who will discuss our financial results and capital position in more detail before we take your questions. IBP achieved another year of record net revenue, net income and adjusted EBITDA. For 2022, consolidated net revenue increased 36% to $2.7 billion. Net income increased 93% to $7.74 per diluted share and adjusted EBITDA increased 54% to $439 million. Throughout the year, we focused on supporting our residential and commercial customers during a very complex operating environment, including navigating continued supply chain challenges and aligning our selling prices with the value we offer customers. The record 2022 results also extend our history of revenue, net income and adjusted EBITDA growth to eight consecutive years every year since IBP became a public company in 2014. I am extremely pleased that our strong performance during 2022 allowed us to continue pursuing our growth-focused capital allocation strategy. We returned a record amount of capital to shareholders in 2022 by investing $138 million to repurchase 1.5 million shares of our common stock and distributing $63 million in cash dividends. In addition, we completed eight acquisitions, representing approximately $109 million of annual revenue during 2022. We believe we can continue to pursue our growth-focused capital allocation strategy throughout the economic cycle, and we remain focused on creating value for our shareholders. Beyond the record results, our role in creating a sustainable future through installing products that promote energy efficiency is an important component of how we define success. During 2022, we published our second annual ESG report outlining the progress we have made along our ESG journey. Employee turnover remained significantly below industry averages, which we believe is a direct result of the investments made in our employee programs since 2017. Since our inception, we have worked hard to promote a culture of doing what's right, and we believe we can continue to make a positive impact in the lives of our employees and the communities in which we operate. Our success in 2022 is also a reflection of the resiliency of our business model, our competitive position within key geographies and end markets, the strength of our balance sheet and the experience and dedication of our senior leaders and employees throughout the company. Since our IPO in 2014, net revenue, adjusted EBITDA and net income have grown at compound annual growth rates of over 20%, 33% and 40% respectively. During this period, we have completed almost 80 acquisitions, expanding our footprint across the U.S. and diversifying our revenue to additional end markets and product categories. This track record of performance is a direct result of our over 10,000 hardworking employees across the country. To everyone at IBP, thank you for your commitment to a tough job always done well. With this overview, let's look into our 2022 full year end market performance in more detail. 2022 was another excellent year of residential sales growth. Within our installation segment, we experienced a 29% increase in residential same branch sales from the prior year, which was driven by a 29% increase in single family same branch sales and a 31% increase in multifamily same branch revenue. By comparison, total U.S. residential housing completions increased by 4% in 2022. While total housing completions growth continued to improve both sequentially and year-over-year during the fourth quarter, we believe U.S. housing completions remain affected by extended residential construction cycle times. Compared to the same period last year, price mix improved 23% in 2022. Consistent with the inflationary trends in the construction industry and the increasing demand for our services, our pricing efforts and relatively stable product mix contributed to the largest annual increase in price mix we've achieved since becoming a public company. We continue to make any necessary adjustments to align our pricing with the value we offer our customers. Within our commercial business, same branch sales increased 7% in 2022, driven by light commercial project growth, which more closely aligns with residential activity. With respect to heavy commercial, bidding activity and project bid acceptance rates remain steady in the fourth quarter relative to third quarter and we are focused on improving our operational efficiency while pursuing projects with favorable economics. We continued to expand our business through acquisitions, prioritizing profitable growth through targeting well-run companies that install insulation and other complementary building products. During the 2022 fourth quarter, we completed three acquisitions, including the North Carolina and South Carolina installer of fiberglass insulation, spray foam insulation and gutters into new residential projects with annual revenue of approximately $21 million, a Pennsylvania installer of spray foam and fiberglass insulation into residential commercial projects that also applies fireproofing and waterproofing to commercial structures with annual revenue of approximately $10 million and a Montana installer of fiberglass and spray foam insulation into residential and commercial projects with annual revenue of approximately $5 million. Throughout 2022, we completed eight acquisitions, representing approximately $109 million of annual revenues, surpassing our $100 million acquired revenue target. Earlier this month, we acquired four state insulation, a residential insulation installer servicing Virginia, Maryland, West Virginia and Delaware, with the annual revenue of approximately $4 million. Looking ahead, our acquisition pipeline remains robust and includes opportunities across multiple geographies, products and end markets. As a result, we expect to acquire at least $100 million of revenue once again in 2023. While 2023 will present market challenges, there are also many opportunities. The backlog in our growing multifamily business is longer than one year. While the national backlog of single family homes is coming down, the number of units under construction continues to be at a historically high level, according to the U.S. Census Bureau. We anticipate solid financial improvement in our heavy commercial vehicle business and strong execution in our repair and remodel business, which helped drive growth of nearly 50% in Q4 2022, with incentives from the Inflation Reduction Act of 2022 likely to support demand this year. So with this overview, I'd like to turn the call over to Michael to provide more detail on our fourth quarter financial results.

Michael Miller, CFO

Thank you, Jeff and good morning, everyone. Consolidated net revenue for the fourth quarter increased to a fourth quarter record of $686 million compared to $534 million for the same period last year. The 29% year-over-year improvement in sales during the quarter was mainly driven by an improvement in price mix and the revenue contribution from recent acquisitions. Our Installation segment revenue increased 23% to $641 million, driven by strong growth across IBP's residential new construction market. The Other segment revenue, which includes IBP's manufacturing and distribution operations, increased to $48 million from $12 million, driven by strong operating results as well as the December 2021 acquisition of AMD Distribution and the April 2022 acquisition of Central Aluminum. On the same branch basis, installation revenue improved 20% from the prior year quarter, driven by single family same branch sales growth of 18%. Multifamily same branch sales increased 37%. Our 2022 fourth quarter residential same branch sales growth was 21% above the prior year quarter, while same branch commercial sales increased 13% in the 2022 fourth quarter. Adjusted gross profit margin improved 240 basis points year-over-year to 31.7% in the fourth quarter, which benefited from strong price mix growth during the quarter. It is important to highlight that our segments have different gross profit profiles. During the 2022 fourth quarter, our installation segment's gross margin was 34% compared to the other segment gross margin of 24%. We believe it is relevant to note the segment impact on our reported gross profit margin, since our other segment includes our more recent acquisitions in the distribution business. The acquisition of AMD Distribution had a limited impact on the prior year fourth quarter as the deal closed in December 2021. The other segment's impact on gross margin in the 2022 fourth quarter was about 70 basis points. Year-over-year improvements in selling and administrative expense relative to sales during the fourth quarter reflects our ability to leverage administrative costs and higher operating expense leverage at the distribution businesses. On a GAAP basis, our fourth quarter net income per diluted share of $2.42 increased 144% from the prior year quarter and our adjusted net income per diluted share improved 71% to $2.43 per diluted share. During the 2022 fourth quarter, we realized a $15 million gain on acquisition earnouts, primarily due to the incentive structure of certain acquisitions completed in 2022. We do not expect to realize similar gains on future acquisitions. During the 2022 and 2021 fourth quarters, we recorded amortization expenses of $10 million related to the acquisition of new businesses. This non-cash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability. Based on recent acquisitions, we expect first quarter 2023 amortization expense of approximately $11.2 million and full year '23 expense of approximately $42.5 million. We would expect these estimates to change with any acquisitions we closed in future periods. Adjusted EBITDA for the fourth quarter of 2022 improved 54% to a fourth quarter record of $115 million. Adjusted EBITDA as percent of net revenue was 16.8% for the 2022 fourth quarter, a 280 basis point improvement from the same period last year. Same branch incremental adjusted EBITDA margin was 33.6% for the fourth quarter, compared to 6.2% for the same period last year. We continue to target full year long-term incremental EBITDA margins in the range of 20% to 25%. For the 2022 fourth quarter, our effective tax rate was approximately 25.9% and we expect an effective tax rate of 25% to 27% for the full year ending December 31, 2023. Now let's look at our liquidity balance sheets and capital requirements in more detail. Our business model continues to generate strong operating cash flow. For the 12 months ended December 31, 2022, we generated $278 million in cash flow from operations compared to $138 million in the prior year period. The year-over-year increase in operating cash flow was primarily associated with higher net income, lower networking capital requirement and proceeds from the termination of interest rate swap agreements for the 2022 full year. Through interest rate swap agreements, we fix the interest rate on $400 million of our existing variable rate debt until December 2028, limiting our interest rate exposure and we have no significant debt maturities until 2028. At December 31, 2022, we had a net debt adjusted annual EBITDA leverage ratio of 1.46 times, compared to 1.87 times at December 31, 2021, which is well below our stated target of two times. At December 31, 2022, we had $327 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the year end December 31, 2022 were $48 million combined, which was 1.8% of revenue compared to 2% for the same period last year. With our strong liquidity position and modest financial leverage, we continue to invest in our acquisition position strategy and return capital to shareholders. During 2022, we returned approximately $200 million to shareholders through dividends and share repurchases. IBP repurchased 1.5 million shares of its common stock at a total cost of $138 million during 2022, which includes nearly 300,000 shares repurchased during the 2022 fourth quarter at a total cost of $25 million, including commissions. Our board of directors recently authorized a new stock repurchase program that allows for the repurchase of up to $200 million of our outstanding common stock. The new repurchase program replaces the previous program and is in effect through March 1, 2024. Today, we announced that IBP's board of directors approved the first quarter dividend of $0.33 per share, representing a 5% increase to our most recent dividend payout. The first quarter dividend is payable on March 31, 2023 to stockholders of record on March 15, 2023. Also as part of our established dividend policy, today we announced that our board has declared a $0.90 per share annual variable dividend in line with the variable dividend we paid last year. The 2023 variable dividend amount was based on the cash flow generated by our operations, with consideration for planned and expected cash obligations, acquisitions and other factors as determined by the board. The variable dividend will be paid concurrent with a regular quarterly dividend on March 31, 2023 to stockholders of record on March 15, 2023. We are committed to continuing to grow the company while returning excess capital to shareholders through our dividend policy and opportunistic share repurchases. With this overview, I will now turn the call back to Jeff for closing remarks.

Jeffrey Edwards, CEO

Thanks, Michael. I'd like to conclude our prepared remarks by once again thanking IBP employees for their hard work, dedication and commitment to our company. Our success over the years is made possible because of all of you. Operator, let's open up the call for questions.

Operator, Operator

Our first question is from Stephen Kim with Evercore ISI. Please proceed.

Stephen Kim, Analyst

Yeah, thanks very much, guys, and thanks for all the color, but I do have some additional questions. I guess the first one was that your price mix looks like it improved sequentially. You had mentioned, I think that your annual mix was stable. Was curious, was there a mix impact in the 4Q sequential move as you went from 3Q to 4Q? And on the other side, volumes were weaker than we expected. And so I'm kind of curious if we should expect volumes to be a headwind again to sales as we head into 1Q '23?

Michael Miller, CFO

Hi, this is Michael Miller. Good morning, everyone. Thank you for joining the call. Regarding the price mix question, we experienced a greater mixed benefit than in the first three quarters of this year. This mixed benefit came from both higher growth rates among our regional and local builders and increased growth in spray foam, which has a higher average job cost than fiberglass. While we observed some mix benefit, the majority of the price mix improvement this quarter and throughout the year was driven by price. When it comes to volume, we will always prioritize price over volume, but I should note that the comparison of our volume metrics to completions may not always match up perfectly. In terms of annual growth, volumes increased by 5.5%, while completions grew around 3.7%. We're pleased with our job numbers, but as I mentioned, we will continue to value price over volume.

Stephen Kim, Analyst

I appreciate your insights. My second question pertains to comments you made in the last quarter regarding your willingness to take necessary staffing actions to protect your incremental margin. I'm wondering if any such actions contributed to the strong incrementals this quarter, or if you found those actions unnecessary.

Jeffrey Edwards, CEO

It wasn't necessary. Jeff Edwards, by the way. So no, that would not even close. We are still busy, and the environment remains healthy for us out there.

Michael Miller, CFO

Yeah, the same way the sales grew 20% during the quarter or so.

Stephen Kim, Analyst

It's great to hear. The builders have recently expressed excitement about a significant increase in activity in January, which is continuing into February. The Toll Brothers mentioned that their most recent week was the strongest they've experienced all year, even with the rise in rates. I was curious if you could share your thoughts on this and whether you've noticed any of this in your discussions and negotiations with your builder customers.

Jeffrey Edwards, CEO

Yeah, this is Jeff again. We're hearing a lot of positive news, which is encouraging. As we know, we're working through a backlog, but there are signs of improvement from builders, which gives us a more positive outlook compared to their comments from the last 45 days.

Michael Miller, CFO

I mean, obviously, it's still very early in the year, very early in the spring selling season, but the very constructive commentary that we're hearing, particularly from the private builders is very encouraging.

Operator, Operator

Our next question is from Michael Rehaut with JPMorgan. Please proceed.

Michael Rehaut, Analyst

Hi, thanks. It's my Mike Rehaut. I appreciate it. First, I'd love to hear your thoughts kind of more broadly on 2023. Obviously, there's a lot of uncertainties still out there and movement, but obviously, we've seen the sharp declines in housing starts over the last several months, and any kind of broad thoughts in terms of how you're thinking about the end market from a completion standpoint in 2023, how it might impact your business would be helpful?

Michael Miller, CFO

This is Michael. No doubt. I mean, everyone on this call knows that permits and starts have been down pretty significantly over the past couple of months. We do believe that, particularly as the comps get easier, there will be some relative stabilization there. As we all also know that the homes under construction to the backlog, both single family continues to be strong on a relative basis. Multifamily is at a very high level. Clearly, we have to get the multifamily completions number growing and bring that backlog down because it's not a very healthy situation where it is right now, but we believe that over the course of '23, there will be improvement on the multifamily completions front, which is important for us because we really made a concerted effort to grow our market share on the multifamily side, which is now 13% of our total revenue. So, we feel very good about the opportunity there in '23. On the single family side, I mean, the backlog is starting to slowly come down, given the permits and starts environment and the order numbers that the public builders have disclosed. There should be for the industry some impact for that as we go into the back half of the second quarter as well as probably the third quarter of this year. But as we were talking in the previous question to the extent that we have a solid spring selling season, which there are a lot of indications that that'll be the case, the cadence of completions versus permits and starts to be such that you're not going to see, assuming a strong spring selling season, you're not going to see that much of a delta or decline in our opinion on single family completions because builders in many conversations that we've had with both public and private builders, they are getting ready for this pickup in order and sales activity so that they can quickly start getting homes started. A lot of the front end trades are not nearly as busy right now. And I think everyone is ready to go. I think unlike, say, during the great recession, which lasted as long as it did, and you had significant contraction in capacity within the industry, we are not seeing that happen right now. What we're seeing is that the industry itself is basically staying sized up because we're all anticipating that this slowdown or pause is not going to be extended. And that as we go through the rest of this year, we'll get back to a more normal cadence.

Michael Rehaut, Analyst

Thank you. As we've discussed, there are many factors at play, and I would like to get your insights on price mix for the upcoming year. We've seen price increases from manufacturers in January, and I would appreciate your thoughts on how that increase is being realized. Additionally, have you engaged with your builder partners about any potential changes in pricing structure that could affect margins? So, I'm looking for your perspectives on both the pricing dynamics and the OEM price increase, as well as the price mix for 2023.

Jeffrey Edwards, CEO

As Michael mentioned earlier, we ensure that we are compensated fairly, focusing on pricing relative to volume. Our team often says that we don't work for free. Ultimately, pricing in our industry is challenging. For example, making three trips to a home to collect $3,500 for installing fiberglass insulation is not easy. We believe we deserve the pay we receive for our work, especially when we show up on time for inspections. This mindset applies during both good and challenging times.

Michael Miller, CFO

And we are constantly in dialogue with both the manufacturers and our customers about price and making sure that, as Jeff said, that is a fair and reasonable price for everybody. I would say on your comment about what we don't provide guidance, I think if you just look historically, our price mix this year is at an unprecedentedly high level compared to prior years, and we certainly wouldn't expect to have that kind of outsized price mix growth in 2023.

Jeffrey Edwards, CEO

Well. We buy from all four.

Michael Miller, CFO

Yeah, we buy from all four manufacturers. We're in constant dialogue with them and, it's on a hard job to try to do as well as we can in any negotiations around that topic. Clearly, as you pointed out, it was a price increase in January, and we'll see. It's still a tight industry in terms of supply chain. There's a little bit of room on that. So at least we're not having to run to supply houses and Home Depot and Lowe's, etcetera, like we had talked about in previous calls. So clearly, that's made our life easier as it relates to kind of running the business on a day-to-day basis. But volume continues to be very tight, and there's not really a clear sight in the scene where that isn't still the case.

Operator, Operator

Our next question is from Susan Maklari with Goldman Sachs. Please proceed.

Susan Maklari, Analyst

Thank you. Good morning, everyone, and congrats on a great quarter and a great year. Well done. My first question is when we think about the dynamics between volume and price mix for this year, obviously in '22, it was really driven by that price mix in '21, and we saw that it was more of volume kind of driven a point in there. How do you think about it going forward or when do you think that those two will start to converge more closely together the way that we had seen pre-COVID?

Jeffrey Edwards, CEO

Well, again, Sue, we don't provide guidance, but, given our commentary from the last question just about what completions might end up looking like and what '23 looks like for the industry, I think what that would say to you is that the likelihood of price mix and volumes being more closely to historical averages would probably be in '24 or the latter half of '23.

Susan Maklari, Analyst

Okay. And then my follow-up is, you obviously have made a lot of progress on the gross margin as well, which was really impressive for the quarter. How do you think about holding on to some of that as conditions perhaps normalize out there, and just more broadly sort of what is the new normal in terms of that gross margin line?

Jeffrey Edwards, CEO

I was serious about the gross margins, which are looking great. We're very pleased with our current gross margin status. Historically, we've stayed within a narrow range for gross margins, and we will continue to strive for improvements to uphold those margins. Most of the enhancement in our EBITDA margin over the last few years has actually been driven by G&A leverage rather than solely by improvements in gross margins. As Jeff mentioned earlier, we don't work for free. We aim to receive a fair price for our efforts, and we believe that is justified considering the complexities of the tasks we are handling.

Susan Maklari, Analyst

I was slow to chime in mostly because I was worried that I was going to have to give Michael a highlight. It didn't look good. Well, those margins are impressive, so exact. All right, thank you, and good luck.

Operator, Operator

Our next question is from Mike Dahl with RBC Capital Markets. Please proceed.

Mike Dahl, Analyst

Thanks for taking my questions. Just another follow up there. If we look at the growth trajectory, the details that you provided in terms of the underlying dynamics between installation and other, you do see more of that gap on margins where maybe a few years back, you would have been in the high 20's and now you're in the 34% range. So it seems like on a like-for-like basis, there has been a notable step up and unique backdrop talk of kind of builders and some of the excitement out there, but also what they're talking about is pushing back more on suppliers. There's conjecture that an installer like yourselves would be the ones that would be at risk of being kind of squeezed out in the middle as kind of the OEMs hold firm and the builders try to push back on trades. Your price comments and price versus volume comments seem a little more pointed, maybe I'm reading into it, but what are you hearing in terms of that push back against the trade base, as everyone's trying to drive cost out and are you seeing something different that's making you say like, maybe we are going to end up giving up a little volume this year as we look to be more disciplined on price?

Michael Miller, CFO

We will prioritize price over volume. Historically, we have consistently focused on price over volume, and as the year progresses, we will make adjustments as needed. We are in constant communication with our customers and manufacturers to ensure our price costs are aligned. As we have mentioned before, we make up a very small percentage of the overall cost of a home, and we are providing an installation solution rather than just selling materials. Our installed solutions add significant value, especially in insulation, which requires inspection and compliance with codes. Builders cannot eliminate our services because we play a crucial role in the construction process, despite our small share of the total cost. All these factors contribute to achieving a fair balance between the costs of the products we install and the prices we receive from customers for those installations.

Mike Dahl, Analyst

Okay, that's helpful. Thank you, and my second question is, they made interesting comments about the R&R side and the Inflation Reduction Act clearly, there's some nice incentives out there, reinflating homes still can be a pretty disruptive process. So maybe just give us a little more color on what you're seeing in terms of the R&R side? How much of an impact or if there's any quantification you can provide on what you think the IRA has meant or could mean to your business in '23 would be helpful?

Jason Niswonger, Chief Administrative and Sustainability Officer

Yeah, this is this is Jason. Hi, Mike. I will say that the Inflation Reduction Act does provide us opportunity on the repair and remodel side, but as we pointed out, it is a bit disruptive, and it's more so a fat majority of our business. Our installers are used to going to a job site, not into somebody's home. So it is something that while we do have and see opportunity from the Inflation Reduction Act in terms of what it could mean for us in terms of providing some stability or upside opportunity. It is not necessarily a widespread or a nationwide opportunity for us.

Mike Dahl, Analyst

Got it. Okay, thank you.

Jason Niswonger, Chief Administrative and Sustainability Officer

I would say that the Inflation Reduction Act hasn't had a significant financial impact until now, as the increased credits only became effective on January 1, 2023. In the fourth quarter, the repair and remodel business, as Jeff mentioned, grew nearly 50% and now makes up almost 9% of our overall revenue. As we consider growth opportunities for 2023, we are particularly encouraged by the strong performance we are witnessing in both the repair and remodel sector and the multifamily housing market, which together constitute over 20% of our revenues.

Operator, Operator

Our next question is from Rooms with Stephens. Please proceed.

Unidentified Analyst, Analyst

Good morning. Thanks for taking my questions. First, pricing was really strong last year in 2022. I was hoping you could quantify how much the pricing achieved in 2022 contributes to growth this year without any additional pricing actions in 2023.

Michael Miller, CFO

You mean how much carryover is there still left to realize in '23?

Unidentified Analyst, Analyst

Right, because given the timing of price increases, partially through last year. Just what at a minimum can we expect?

Michael Miller, CFO

Well, we don't provide guidance. It would, I would say that each quarter, it's going to come down, which is an obvious statement. As we're going through this first quarter, we are continuing to realize good price mix.

Unidentified Analyst, Analyst

Got it. That's helpful, and I appreciate that you don't give guidance and thank you for all the prior commentary on price and volume, as we look to '23, but given that there's some risk of volume in 2Q, 3Q, maybe even 4Q, still getting a little price. Is it unreasonable to expect that you can grow overall revenue in '23?

Jeffrey Edwards, CEO

Well, again, we don't provide guidance, but that is really going to depend on what happens with the single family completions and the housing market as it unfolds and when I am saying the housing market, the single family market as it unfolds during the course of the year. While we have heavily diversified our end market revenues, 60% of our revenue still comes from new single family. So, I think the spring selling season is important this year. It's important every year, but I think, yeah, the focus on it is going to be higher this year than probably in past years and as we said earlier, we think that there's very encouraging signs around a potential solid spring selling season and I think that will benefit the whole industry going through the course of '23.

Unidentified Analyst, Analyst

Got it. Thank you. That's helpful, and good luck with the rest of the year.

Operator, Operator

Our next question is from Adam Baumgarten with Zelman and Associates. Please proceed.

Adam Baumgarten, Analyst

Good morning, everyone. Couple of questions on price increases, at this point, do you guys expect the manufacturers of the fiberglass manufacturers to announce additional price increases at some point this year?

Jeffrey Edwards, CEO

Certainly, they still are experiencing inflationary circumstances, let's just say in certain parts of it from an input perspective, etcetera, although there's maybe a little bit of weakening in certain instances in freights, other things, but, we'll see. I guess I mentioned earlier, rules is type that's not so much. So I'm certainly would like to, if I believe that about it.

Michael Miller, CFO

Actually, there might be one additional price increase announcement this year, but obviously, we don't know that their decision and how they'll make it, and I think it will completely depend upon how the market unfolds.

Adam Baumgarten, Analyst

Yeah, okay, makes sense and then just searching gears to commercial. I have a slide in the deck that came out this morning about three areas outside the quote core that you seem to be targeting with expansion joints through frustration and building restoration. I guess, question, are you currently in those areas and if not, is that you know an acquisition opportunity for those areas of focus?

Jeffrey Edwards, CEO

We're exploring various scopes of work, although we're not heavily engaged in this right now. As we've mentioned in previous calls, we have been disappointed with the financial performance of our heavy commercial operations. However, we anticipate significant improvements in these operations throughout 2023, and we are looking into different scopes of work that will aid in enhancing the heavy commercial sector. Currently, this sector constitutes a little over 6% of our total revenue. While it may not be a considerable portion, it is still a crucial element, and we believe it offers some promising long-term growth opportunities for us.

Operator, Operator

Our next question is from Phil Ng with Jefferies. Please proceed.

Unidentified Analyst, Analyst

Hey, good morning. This is Maggie on Phil. First, I guess, could you talk about your backlogs or maybe even more broadly, the industry backlogs, and kind of contextualize that units under construction metric being at these historic highs and how that kind of translates to volumes for you and how far that carries you into 2023?

Jeffrey Edwards, CEO

Right now, when examining the units under construction, it's important to distinguish between single-family and multifamily homes. Multifamily construction is currently at an unprecedented level, with the backlog for multifamily units surpassing that of single-family units, which is rare in history. From an industry standpoint, the multifamily backlog is significant at this point, and as mentioned earlier, we expect to see improvement in multifamily completions throughout 2023. For single-family homes, the backlog remains between 700,000 and 750,000 units, which is considered reasonably healthy. This suggests that if the multifamily backlog were normalized, we might see a completion pace around 1.2 million, though that's below the typical long-term average of 1.5 million. Nevertheless, it's still a comfortable level. Regarding the single-family backlog's implications for the industry, much will depend on the spring selling season, which currently looks promising. However, considering the decline in permits and starts we've observed recently, it's reasonable to assume an impact on single-family completions as we approach the end of the second quarter and enter the third quarter. I will adjust that outlook based on the developments of the spring selling season and how quickly builders, who we believe can act swiftly, respond to what could be strong order growth.

Unidentified Analyst, Analyst

Okay, great. Thanks for all of that color, and then I guess on that. it's been touched on a few times on the call so far, kind of the more recent optimism from the builders and I think late last year, coming into this year, the consensus was kind of we would need to see interest rates come down or at least stabilize or some progress on getting home prices at a more affordable level for these mortgage rate levels to really see a rebound in housing demand, but we haven't really seen significant progress on either of those. So you know from your conversations with customers, what's their sense, what are they attributing this more recent strength to and how sustainable do they see that?

Jeffrey Edwards, CEO

I believe this reflects the fact that we haven't yet stabilized production at around 1.5 million units for residential housing, indicating that the market is underbuilt. There’s only so long that the market can remain stagnant, and while there has been a slight uptick, it's pulled back from seven to nearly six. Interest in adjustable rate mortgages seems to be limited compared to the past. Builders are offering buydowns that may attract buyers initially, but often these buyers do not end up utilizing them and still proceed as buyers. From my observations, some buyers are considering options with one, two, or even three-year terms without penalties, allowing them to navigate this period while feeling the need to move forward in their lives. I hope that in the next 12 to 24 months, things will settle down.

Michael Miller, CFO

Yeah, I think the home buyer has adjusted and they're accepting the new reality, and I think people have come to grips with the fact that they're not going to get a 3% mortgage, but they still need some place to live and their family is growing, or they got a new job and it goes on.

Jeffrey Edwards, CEO

For those of us that are pretty old, at least 60 in June, that's not real, old enough, I guess 6% we're in that range is pretty darn attractive historically speaking. It's only those that have kind of been familiar with the last 15 years, 10 years or really 10 years or less, right, where there's a rate that have been less way, that you've read so much about.

Unidentified Analyst, Analyst

Okay, got it. Thanks so much and good luck on the next quarter.

Operator, Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Jeffrey Edwards, CEO

Thank you all for all your questions and I look forward to our next quarterly call. Thanks again.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.